WASHINGTON, April 12, 2016 – Wow! What a wonderful Tuesday for the bulls! The big news coming across the tape: The Saudis and the Russians appear really, really likely to ink a deal as early as this weekend to freeze both countries’ massive combined oil output at current levels. And get this: They’ll do it even if the Iranians don’t play. Best of all, we know this is true, because we read it on the Internet, in article after article no less.
After sludging around for roughly a week as markets generally dribbled down, the bulls were off and running with the news this morning. As of the noon hour, the Dow Jones Industrials (DJI) are up 141+ points, nearing the 1 percent mark in terms of day over day increase. The broader based S&P 500 is up a decent 13.75 points, closing in on the +0.75 percent mark. Even the lately anemic, tech-heavy, small-cappish NASDAQ is up over a third of one percent, popping a modest 16.53 points.
Getting the bulls even more worked up, continuous exciting news keeps hitting the wires, all of it bullish. As a result of the absolutely, positively for sure Saudi-Russian production freeze, Brent crude is currently trading at its highest price since the dawn of 2016 at roughly $44 bbl., while U.S. benchmark West Texas Intermediate (WTI) is nearly $42 bbl., $2 higher than the $40 per bbl. level the punditocracy tells us that U.S. producers—particularly the little guys—need to sell oil in order to at least survive.
All this is really unfolding on Tuesday. The only problem: given all the financial hype lately, we can’t count on any of this to be the truth. Or, even if it is at its most basic level, we have to take it with a grain of salt.
The major story driving all these bullish moves on Tuesday is the oil price freeze buzz. The problem with this story is that it’s reminiscent of all those rally-inducing stories in 2015 that revolved around European Central Bank (ECB) head Mario Draghi’s series of absolutely, positively for sure miracle moves to boost the Eurozone’s moribund economies.
Although Draghi and the ECB didn’t exactly stand pat that year—or this one—the moves the European Central Bank actually made were A.) Underwhelming; B.) Generally happened months after a series of false announcements were made; and C.) Have yet to solve Europe’s economic problems which are based on massive past socialistic economic promises that remain unfunded and can never be fulfilled.
Similarly, the current never-ending series of breathless Saudi-Russian oil production freezes will ultimately prove equally nonsensical. Both countries are currently extracting oil from the ground at the highest conceivable levels. Ergo, even if they do freeze current production, they’re only freezing it at a peak level of production, which means precisely nothing in terms of the present world oil glut.
And, of course, neither the Iranians, the Venezuelans, nor any other country currently sliding into bankruptcy due to current oil pricing is going to slow their pumps down at all. The Iranians, after all, need the petro-dollars from rising production to complete their peaceful research projects that include assembling a nuclear arsenal and perfecting their missile delivery systems for the Armageddon they’re planning to cause.
As for the Venezuelans—well, they need all the money they can get to prevent the overthrow of their current
Communist government People’s Paradise, which is in the final stages of reducing that country’s economy and people to permanent ruin.
All of which means that all these great headlines mean absolutely nothing.
But the media and government spin machines are in constant action. And oil prices are jumping along with the hype, almost certainly as a result of central bank and sovereign fund purchases of the assets they’re trying to boost. Mainly oil. The idea is to trick everyone into believing that inflation is on the rise and that deflation is just a hoax being perpetrated by mean-spirited economic conservatives and grouchy, iconoclastic pundits like yours truly.
If The Powers That Be (TPTB) can trick the citizens of the world into actually believing all this nonsense, they might finally be able to trigger the inflation they’ve been pursuing since roughly 2008 just by persuading everyone that it’s there.
The whole idea all along was to inflate asset prices to the point where all the negatives of the Great Recession would magically go away. Nothing would change. Everybody would be back at work at last. And the really rich guys and their political stooges would get to keep all the money they stole from the taxpayers in the meantime. We actually wish them well, in a way. It could save us all from a bloody revolution.
Today’s trading tips
We’re at a crucial time of year. Tax season is upon us, which is historically a bullish period in the markets. But we’re also nearing “Sell in May” territory, and in recent years, big investors have quietly been selling in April to beat the May rush. We are worried about the market and are likely to do the same thing shortly.
That said, we remain in a stack of mostly near-term maturing preferred stocks and bonds, most of which we picked up on discounts from face value. Which means that while we collect the interest on these investments, we’ll also get at least modest long-term capital gains when the issues mature, at this point mostly between 2019 and 2022.
These investments can go up and down—a lot—in the meantime. But the ones we hold are mostly high-quality, which means their corporate parents are most likely going to be around when we’re supposed to get our principal back.
We also continue to invest sparingly in the oil patch, currently favoring small nibbles—very small—of beleaguered UK producer British Petroleum (symbol: BP) and French producer Total (TOT). Both pay nice dividends and both have streamlined their balance sheets so that even a modest premium in the price of crude will do wonders for both companies’ profitability.
We have a small position in Swiss pharma giant Roche (RHHBY), which swings at times like a biotech, which it partially is given their purchase years ago of American biotech Genentech. We’re looking at French pharma giant Sanofi SA, but we’re hoping for a better price.
Why all these “foreign” investments, particularly when the Eurozone is a basket case? Simple. They’re priced much more reasonably than U.S. counterparts, and we’ve long been historically underweighted in non-U.S. stocks, violating the general diversification of assets rule.
The Allergan Preferred Paradox
Finally, we’ve been accumulating in dribs and drabs the preferred stock of another international pharma giant, Allergan (AGN). AGN was for years a first-tier U.S. based company famous for its Botox products among others as well as its consistently excellent pipeline and product portfolio.
When the currently-under-the-microscope Québec-based Valeant Pharma (VRX) launched a hostile takeover attempt aimed at AGN last year, AGN found a white knight in Dublin, Ireland-based Actavis which succeeded in this mega-merger attempt, accomplishing two objectives in one. Actavis already was a mostly-U.S. company that ended up based in corporate tax-friendly Ireland due to an earlier series of mega-mergers.
By allying with Actavis, Allergan not only escaped Valeant’s Bill Ackman-funded clutches. It also managed to “invert” itself with Actavis, thus benefiting from being based in Ireland. Actavis, BTW, promptly renamed itself after its takeover partner, given Allergan’s high reputation in the investment world.
But now, as Paul Harvey used to say, “The rest of the story.”
Hogging the headlines last week was the news that the Obama administration torpedoed the latest iteration in the Allergan story, thwarting its friendly takeover by another pharma giant, Pfizer (PFE). Pfizer continues to search for additional companies to buy or merge with to boost its own research pipeline and product portfolio.
Finding a mutually advantageous partner in Allergan, it worked out a deal to merge with that recently merged company AND switch its corporate home to Dublin by way of the deal, thus dodging those highest-in-the-world U.S. corporate taxes.
Given that Obama would always rather screw a U.S. company rather than let it lessen its tax burden by moving corporate HQ abroad; and given that he would never, ever consider revising downward the U.S. corporate tax rate so American companies would just stay here and maybe even bring back some of the trillions of dollars they’ve parked abroad, his administration predictably scotched the deal.
In a takeover maneuver, the target company—in this case Allergan—generally makes a major upward move to the more-or-less predicted stock price at which it is likely to be acquired. After the PFE-AGN agreement was announced, AGN jumped from the $260 price range to trade between $300-$322 per share range by December 2015. It was sitting at around the $300 level when the bad news hit, sending the stock into a whopping tailspin that continues today.
As of Tuesday afternoon, AGN is off another $6.04 just on the day, currently priced at $222 and change, only $1 off its 52 week low. Nothing is wrong with the company. The market is just adjusting the stock back down to reflect the loss of the hoped-for premium based on the likely final Pfizer takeout price.
Which gets us back to our earlier point. Allergan has a preferred stock (symbol is AGN/PRA with our broker—other brokerage houses might use a slightly different symbol) that pays a handsome dividend of 5.50 percent.
This preferred is slightly unusual for a pair of reasons. First of all, most preferred stocks available today are priced at $25 face value. This means that no matter when you buy it, if the issue is ultimately redeemed at par (face value), you’ll get $25 per share for each share you own, whether you paid more than $25 or less for each share.
But AGN/PRA, like some bank preferred stocks, is priced rather like a bond. Par or face value for this preferred is a substantial $1,000 per share. So on a dollar basis, it’s expensive for small investors to buy in any quantity.
However—and here’s the good part—the preferred stock has taken just as bad a hit as AGN’s common stock. It’s off again hugely today. As of 1 p.m. EDT, the preferred is down $14.50 just on the day, a nasty 1.75 percent. It’s currently perched at about 820 per share at the moment, giving it an effective yield of 6.6 percent, since it’s selling at a discount from par.
But even better: AGN/PRA isn’t just a preferred stock with no fixed redemption date. It’s what’s called a “term preferred” stock. In this case, the “term” or mandatory redemption date is March 1, 2018. That means that shares an investor buys today will be redeemed on March 1, 2008 at $1,000 per share. That means that shares bought at 820 today will give you an approximately 18 percent capital gain if you simply hold them until the mandatory redemption date.
Better still: While you wait, you’ll be getting a quarterly dividend of $13.75 per share in the meantime.
How market mispricing like this happens is beyond the Maven’s ken. Perhaps it’s simply because, for various reasons, stocks like this are off the radar screens of hedge funds and high-frequency traders. Prices of issues like this one are thinly trading and can thus be heart-stoppingly volatile.
We’ve already started acquiring shares of this preferred in little nibbles, and we’re down fairly substantially at the moment as the stock seems determined to sink further. Yet while there are zero guarantees in the market, the parent company of this preferred is in great financial shape and is so large that it would probably take something as bad or worse than the Great Depression to kill it off. So we think that taking a hit now is worth the payoff in 2018, not only in capital gains but in ongoing dividends as well.
We offer our trading diary here, so this isn’t a pump and dump exercise. We already told you we own some shares of AGN/PRA. We intend to acquire more if and when it sinks further. So you’re on your own.
If you have any interest in something like this, you’re on your own. Do your own due diligence. Make sure you’re comfortable with volatility, because you’ll get it here. A lot.
But on balance, it looks like a good bet to collect some decent income while waiting for the underlying vehicle to mature. In a market that’s as manipulated as this one, that looks like a decent investment to us.
Which leads to our conclusion, which is the Maven’s brand new Number One Trading Rule for 2016: Look for investment bargains in stocks where hedge funds, quants, algos and HFTs (high-frequency traders) cannot or will not invest. This tactic will minimize the ability of these thieves to wreck your portfolio.
As always, no guarantees. But we’re looking for ways to at least even the odds for the small investor in this highly manipulated stock market.
Disclosure: The author of this article currently holds positions in TOT, BP, and AGN/PRA.